Deutsche Post IPO scoops a clear win

The mundane world of post offices is not the sort of thing that normally gets investors foaming at the mouth. Now and again, however, a nice boring company like Deutsche Post with something called cashflows is exactly what investors are after.

The €6.6bn ($5.8bn) privatisation of Deutsche Post may not have been the most spectacular performer of the year, with its shares trading just 7% above their issue price. But after the rout in the telecoms and technology sectors, that is the sort of performance for which many investment bankers would gladly sell their grandmothers.
Deutsche Post, or Deutsche Post World Net, to give it its full new economy name, may seem a strange choice as the Financial News Deal of the Year. After all, this was a deal that raised just two-thirds of what the German government had originally hoped. The price range was steadily massaged downwards through the autumn, and then the shares were priced well below the top of the range. German investors did not blindly order their shares and retail interest outside Germany was disappointing.

Yet while sexier deals, such as the €6.1bn IPO of Infineon, the German semiconductor company, or the mammoth €5.5bn block trade in Vodafone, have strong claims, Deutsche Post stands out as a clear winner. No other company came close to a deal of the same magnitude under such difficult market conditions, with a deal structure which was flexible and broad enough to react to them.

It also pushed forward the boundaries of the European equity capital markets with the first cross-border retail offering on an IPO. And frankly, it was not an easy story to sell.

The Deutsche Post IPO in November came at the back end of the most volatile new issue market in recent memory. Investors had, in effect, gone on a work-to-rule strike, refusing to buy anything unless they absolutely had to.

Joerg Illhardt, a managing director in equity capital markets at Deutsche Bank, which was joint bookrunner on the deal with UBS Warburg, says: 'Deutsche Post was a challenging deal in an extremely weak capital markets environment. It was a challenge to get people to sit down and talk about the company when many investors had suffered from the market downturn and were looking at their performance numbers for the end of the year.'

In addition, German retail investors, who traditionally eat privatisations for breakfast, were nursing big paper losses on Deutsche Telekom's secondary sale in June. For good measure, the Neuer Markt, a staple diet for German mutual funds and retail investors, was over 50% down on the year and had fallen around 25% since the books opened on Deutsche Post on October 30. No surprise then that the stiffest price sensitivity came from German funds.

As if the market conditions weren't tough enough, the two banks also had the mammoth task of running the cross-border retail offering in seven countries outside Germany: the UK, Italy, Spain, the Netherlands, Austria, Switzerland and Japan. While Deutsche Telekom had laid the ground work in 1999 and in June 2000 with its international retail offerings, Deutsche Post was the first IPO to try the same. The documentation had to be translated and adjusted to regulatory requirements in each local market.

In retrospect, the cross-border offering, which was decided in the summer, was not ideally suited to the market conditions in October and November. European retail investors outside Germany ordered just 7% of the total retail demand on the deal, despite the offer of a 50-cent discount in the early order period. On the other hand, Japanese retail investors loved it, ordering nearly half as much stock as their German counterparts.

Michael Bednar, an executive in equity capital markets at UBS Warburg, said: 'The cross-border offering generated solid retail demand, although this lagged somewhat behind expectations primarily because of market conditions, but also because of a few large transactions in the rest of Europe competing for reduced overall retail interest.'

However, with 450 million shares ordered by retail investors, the deal was on track. Illhardt says: 'The deal was already covered by the end of the early order period. That was a very strong message to take with us into the final days of the roadshow.'

That roadshow is what swung the deal. Over three weeks, Klaus Zumwinkel, chief executive of Deutsche Post, and Edgar Ernst, finance director, toured 36 cities holding 26 group presentations. Between them they also completed an exhausting 148 one-on-one meetings with investors. Despite the market conditions, these one-on-ones generated a 96% hit rate in terms of orders.

These individual meetings clinched the deal. When the books finally closed, the deal was eight times covered. The majority of this €50bn in demand came from investors who sat down individually with the company.

This is all the more spectacular given that Deutsche Post was not a deal that was going to sell itself. A glance at the usually benign risk factors in the prospectus would be enough to have most investors running for the exits. Deutsche Post is under investigation by the European Commission into alleged abuse of its monopoly in mail delivery to subsidise its loss-making activities and acquisitions. It has limited ability to set its own price structure, and the monopoly on which it relied for 90% of its profits in 1999 will end in 2003.

Like the former monopoly telecoms companies, it may in time have to open parts of its infrastructure to rivals at disadvantageous rates. And it may have problems integrating some of the 30-odd acquisitions it has made in the past four years at a cost of around €7bn. Any takers?

The bankers focused on the remarkable transformation of Deutsche Post from the worst example of state-owned inefficiency to an aggressive international player in the 10 years since Zumwinkel took over. 'Deutsche Post was a perfect combination of old economy stability with new economy upside for the market at the time. It has very solid cashflows, and enormous upside in its express and logistics divisions,' says Bednar.

The banks were also able to play down the big question of the end of its monopoly in mail delivery. First, the proportion of profits generated by the mail division is falling steadily, so the company will be less dependent on them in future. Second, when the monopoly does end, delivering letters to every corner of Germany is not the cheapest business for rivals to get into.

When it came to pricing, all sides showed admirable constraint, especially KfW and the German government, which was keen not to damage its prospects for the rest of its privatisation programme. While the issue price of €21 was slightly higher than had been expected in the final weeks before the deal, prompting some retail selling on day one, the price has since been vindicated.

Deutsche Post has not closed below issue price, despite the fact that the DAX 30, of which Deutsche Post will become a member next year, has dipped slightly since the deal. If it can climb to around €24 by the end of the year, that would give a premium of around 15%, which is what used to be the benchmark of a well-priced deal. Perhaps it still is.